Germany’s economy is growing nicely, which is bullish for the German stock market (DAX)

A country’s stock market follows the state of its economy in the medium-long term. Germany’s economy faced significant problems from 2011-2012 and 2014-2015. That is why the German stock index DAX is relatively undervalued compared to the S&P 500.

Here is a monthly candlestick chart for the DAX from 2006 – the present.

Germany’s economic data since early-2016 has been very bullish for German stocks and continues to be so. The German economy is rapidly recovering, and data over the past few months confirms this.

Even the European Central Bank said that the EU and German economies are improving. However, the ECB is not ready to hike rates just yet.

*Germany is important because it is the economic engine of the entire EU. Hence, it has a significant influence on the global economy.

*As you can see in the post below, the best German economic indicators are all related to exports. Like China, Germany is a very export dependent country. The U.S. on the other hand relies on domestic demand.

*It is hard for non-German speakers to know which of Germany’s economic data is important and which is just useless noise. We’ve done this separation for you.

Germany Ifo Business Climate Index

Unlike the United States, Germany’s best leading economic indicator is actually published by a private institution. Savvy German investors care about this indicator the most.

The Ifo Business Climate Index is based on a survey asking businessmen how they feel about the current state of doing business in Germany. “Is the macro-environment improving or deteriorating?”

As you can see in the chart above, the Ifo Index has been improving since the beginning of 2016. Business sentiment has turned exceedingly positive and grown over the past 3 months, which is good for the German stock market. This index is by far the best leading economic indicator for Germany.

Inflation

Germany’s inflation rate fell steadily since 2012. Germany flirted with deflation in 2015, which is dangerous because deflation usually happens during economic recessions. That is why the European Central Bank has tried so hard to fight deflationary forces over the past 3 years.

With oil prices on the rise and the German economy improving, inflation has risen significantly since Q1 2016. This means that the deflationary fears are over. Inflation made a remarkable jump in November and December 2016. Since then, it has stabilized at around the 2% mark. Inflation is unlikely to rise more in the next few months because:

The price of oil is stabilizing.

Germany’s economic growth will slow down a little bit in the next few months. Growth is always strongest when an economy initially comes out from a downturn (ie Germany in 2016). Once the initial phase is over, growth will slow down a little to a normal and healthy rate (i.e. Germany right now).

Germanys Manufacturing PMI

Since Germany is a manufacturing oriented economy, its Manufacturing PMI is a good indicator for the state of the broader economy.

The PMI was falling in 2014 and was flat in 2015. Since early-2016, PMI has risen nonstop. This is partially because China imports a lot of German goods, and the Chinese economy has improved since early-2016. Here is a 10 year chart for Germany’s PMI.

PMI has continued to surge incessantly over the past 5 months. The PMI report is inline with the Ifo Index. Both indicators state that Germany businesses are facing improving macro-conditions, which is bullish for the German stock market in the medium-long run.

Producer Prices

Germany’s producer price change is a mirror of its CPI inflation rate. CPI measures price changes for producers, while PPI measures price change for manufacturers and businesses. Producer Prices is important because Germany is a manufacturing oriented economy.

Just like the inflation rate, Producer Prices declined from 2011 to 2015 and have risen significantly since then.

The year-over-year change in Producer Prices finally turned positive by November 2016.

No content or intellectual property from BullMarkets.co or Fundamental Capital may be distributed, reproduced, stored in a retreval system, or transmitted in any form or by any means: electronic, mechanical, photocopying, recording, or otherwise, without written consent from Fundamental Capital.

BullMarkets.co is owned by Fundamental Capital, an independent investment research firm.